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As this Figure demonstrates, prior to the autumn of 2004 there was observed a rather moderate growth in reserves, which has significantly accelerated later. Thus, in January through August the amount of gold and foreign exchange reserves increased by 14.1 per cent, while in September through The RF Monetary Base in broad definition includes cash in circulation, the Ruble denominated funds in mandatory reserves relating to the borrowings of credit organizations, and funds in credit organizations correspondent accounts and commercial banks' deposits with the Bank of Russia.

Jul Jul Jul Jan Jan Jan Sep Sep Sep Mar Mar Mar Nov Nov Nov May May May mid-December by 7.3 per cent. Therefore, over the year the monetary base grew much more evenly than reserves. The fact that the rates of growth in the monetary base were below the rates of increase in reserves may be primarily explained by the accumulation of considerable amount of financial reserves in the stabilization fund. In January through October of this year, the net credit to the government diminished by RUR 905.3 billion, as a result, the government became the net creditor of the Central Bank.

Changes in the Monetary Base and in the Gold and Foreign Currency Reserves in 2003 - 2004.

1370 Monetary Base (billion rubles) Gold and Foreign Currency Reserves (billion dollars) Fig. According to the preliminary estimates presented by the RF Finance Ministry, in January through November of 2004 the payments pertaining to the RF foreign debt amounted to RUR 404.1 billion.

The payments associated with the servicing of the foreign debt made RUR 155.3 billion, while the repayment of the principal debt amounted to RUR 248.8 billion. At the same time, new borrowings were registered at RUR 39.4 billion.

On December 10, 2004, the Board of Directors of the RF Central Bank approved the issue of three funded loans of the Bank of Russia totaling to RUR 300 billion. The terms of the issue should be determined later. According to the information published by the Central Bank, this issue is aimed at the formation of reserves for sterilization operations.

In November of 2004, the Board of Directors of the RF Central Bank approved the Key guidelines of the common state monetary policy for year 2005. The said document retained the forecast of the inflation rates for the next year in spite of the failure of forecast for year 2004, what no doubt resulted in a growth in inflation expectations of economic agents. Therefore, the probability that inflation rates will decrease to 6.5 per cent to 8.5 per cent in 2005 is rather low.

At the same time, the document sets forth the real effective Ruble exchange rate as the benchmark of monetary policy. However, the methods of calculation of this indicator are rather arguable, what does not permit to detect a clear relation between the real effective exchange rate and the competitive capacity of Russian producers. Besides, inflation rates in the RF remain at a rather high level and from our point of view, the main efforts of the Bank of Russia should be aimed at the struggle against inflation.

At the end of the year, the management of the Bank of Russia stated that there was a probability of changes in the structure of gold and foreign exchange reserves. Prior to the moment of the statement, the total amount of gold and foreign exchange reserves was composed as follows: the share of US $ made 70 per cent, Euro made 25 per cent, and other foreign currencies made 5 per cent. It seems that the Central Bank planned to introduce the announced changes due to a continuous depreciation of the US dollar against major world currencies.

P. Trounin billion rubles billion dollars 2-8.03.1-7.12.4-10.05.6-12.07.8-14.09.20-26.01.10-16.02.23-29.03.13-19.04.25-31.05.15-21.06.17-23.08.20-26.10.10- Markets In December, the general state of financial markets was characterized by a certain deterioration of the price situation in spite of the fact that by the end of the month in certain segments of the Russian stock market there was observed a growth in quotations. In December, the market paid special attention to corporate news, which primarily determined the market dynamics. In particular, a significant fall of the stock market continuing up to the last but one week of the month was caused by the situation related to the auction for the sale of Yuganskneftegaz, as well as the lodging of tax claims for year 2001 against Vympelkom. All these events were perceived by the market as the additional evidence that the government intended to continue its course towards expansion of its influence in the private sector of the economy. All these developments resulted in the fact that foreign market participants refrained from operations with Russian securities and the dynamics of the stock market were primarily determined by the behavior of profit seeking gamblers.

The Market for Government Securities In the last month of this year, the quotations of Russian forex denominated bonds have somewhat increased in comparison with the levels registered at the end of November. Over the month, the major factor behind the market developments was the dynamics of US treasury bills. At the same time, the quotations were significantly affected by a number of other factors. For instance, the lodging of tax claims against Vympelkom and Megafon caused a decline in prices on the market. The results of the auctions for the sale of Yuganskneftegaz also did not facilitate a growth in quotations. Besides, an important favorable news for the market of forex denominated borrowings was the fact that the ranking agency Moodys raised the ranking of Gazprom to the investment level.

As on December 23, the yield to maturity of Russian Eurobonds RUS-30 was 6.55 per cent p.a.;

RUS-18: 7.02 per cent p.a. Besides, on the same date the yield to maturity of the Russian Eurobonds was: Minfin bonds, 7th tranche: 5.88 per cent; Minfin bonds, 6th tranche: 4.20 per cent; Minfin bonds, 5th tranche: 4.99 per cent; RUS-07: 6.35 per cent.

Figure Minfin bonds' yields to maturity in October - December, 8.0% Tranche 5 Tranche 6 Tranche 7.0% 6.0% 5.0% 4.0% 3.0% 2.

Yields to maturity of the Russian eurobonds with maturity in 2030, 2018 and 2007 in October - December, 8.5% 7.5% 6.5% 5.5% 4.5% 3.5% 2.5% USD-2030 USD-2007 USD-The situation on the market of Ruble denominated government debt was primarily affected by the factor of Ruble appreciation against the US dollar and high liquidity in the banking sector. In the beginning of the month, the Ruble exchange rate supported the quotations of government bonds; however it could not completely compensate the adjustment trends. The quotations of most liquid securities declined, what, as it seems, was determined by the growing inflationary expectations, which already could not be compensated by the appreciation of the national currency. Later, on the market there was observed a significant increase in the turnover of the secondary market, what was determined by the placement of OFZ 28005, the amount of which made about RUR 15 billion, or about per cent of the weekly turnover. As concerns other placements, the respective activity was not so high, what was observed in the course of auctions. On the whole, the market dynamics were primarily determined by the situation on the forex market.

Over the period from December 1 to 23, the aggregate turnover of the secondary GKO OFZ market made about RUR 40.6 billion (approximately RUR 49.1 billion over the respective period in November), while the average daily turnover was at RUR 2.54 billion (RUR 2.58 in November). Therefore, the activity of the market was at the level observed in the preceding month.

On December 5, there took place an auction for the placement of OFZ AD 46014. The amount of the issue made RUR 7 billion, while the actual amount of placement made RUR 1.49 billion. The weighted average yield of the placement made 8.0 per cent p. a.

As on December 23, the amount of the GKO OFZ market made RUR 557.56 billion at par and RUR 540.83 billion at the market value. The duration of the GKO-OFZ market portfolio was 1755.days.

The Market for Corporate Securities The business situation on the stock market. Throughout the month, the dynamics of quotations have differed significantly. Thus, in the beginning of the month, on the domestic stock market there prevailed the trends towards a decline in quotations. The factor behind this development was the information that privatization of generating companies in electrical power engineering was delayed at least till the end of 2005. The information that Gazprom is going to participate in the auction for the sale of Yuganskneftegaz had somewhat intensified the trade with the shares in this monopoly; however, it failed to significantly affect the market at large. The statement of the ranking agency S&Ps that slow reforms could not be a barrier to a rise of the Russias credit ranking had supported the market.

Later, a decline of the market continued at the background of negative corporate news. In particular, the market was negatively affected by such a factor as the information about lodging of tax claims against Vympelkom, a company, which was created after the period of dubious privatization transactions and being one of the most transparent companies in Russia. The market also could be negatively affected by the statement of Exxon Mobil to the effect that this company was not going to participate in the auction for the sale of Yuganskneftegaz in apprehension of higher risks associated with the investment in Russian assets. The statement made by M. Fradkov to the effect that shares in RAO UES of Russia would present the payment in the course of purchase of the power generating companies had almost stopped the fall of the stock of the energy monopoly, but failed to support the market at large.

By the end of the third week of the month, the RTS index remained at the practically the same level.

At the same time, by the end of this week, the sales resumed due to the negative news background. By the end of the month, the situation on the market had significantly changed and was characterized by a considerable enhancement of activity and a rise in stock quotations, what compensated the decline in prices observed in the beginning of the month. The developments in the corporate sector were also intensive. In particular, investors paid attention to the results of the auction for the sale of Yuganskneftegaz, where the practically unknown company Baikalfinancgrupp became the formal winner of the auction. However, the uncertainty abided by the end of the week, when it became known that the buyer of the key YUKOS extraction asset was purchased by Rosneft. The fact that the auction was not transparent was the additional evidence that the authorities were ready to use any available means in the struggle for their interests in the private sector.

Figure 3.

90 800.The total volume of trading ($) 80 750.The RTS Index 70 700.60 650.50 600.40 550.30 500.20 450.10 400.350.On the whole, in the period from December 1 till December 23, the RTS index decreased by 2.per cent or by 13.9 points in absolute terms. Over the same period, the turnover of the RTS trading amounted to about US $ 318.7 million (about US $ 321.5 million in the same period in November), while the average daily turnover at the RTS made about US $ 18.7 million (US $ 16.9 million in October). Therefore, in comparison with the data collected in the preceding month, the activity of investors has practically not changed. The highest and the lowest volumes of trade at the RTS made US $ 47.3 million (on December 8) and US $ 5.3 million (on December 17) as compared with US $ 38.million and US $ 6.2 million respectively in November.

points mln US dollars s the last month (from November 26 till December 24), the majority of blue chips demonstrated a decline in prices. The leaders in terms of the downward movement of prices remained shares in YUKOS, the price of which decreased by 28.5 per cent over the month. The YUKOS stocks were followed by the shares in Rostelekom (-18.39 per cent), Nornickel (-8.63 per cent), Surgutneftegaz (6.76 per cent), LUKoil (-6.51 per cent), and Tatneft (-4.97 per cent). The shares in Sberbank demonstrated practically zero dynamics (the prices of these securities increased by mere 0.42 per cent). At the same time, the shares in Mosenergo (+ 2.92 per cent), RAO UES of Russia (+ 3.19 per cent), and Sibneft (+ 6.79 per cent) were characterized by positive dynamics.

Figure Dynamics of the Russian Blue Chips from November 26 to December 24, 10% 0% -10% -20% -30% Change in price (%) In December, the list of leaders in terms of the volume of turnover at the RTS9 looked as follows:

the shares in the RAO UES of Russia (28.71 per cent) and LUKoil (23.57 per cent). Besides, according to the results of weekly trade, among the leaders in terms of the volume of turnover were also the securities of Surgutneftegaz, Norilsk Nickel, and Sberbank of Russia.

As on December 24, the top five leaders of the national stock market by capitalization looked as follows10: Surgutneftegaz: US $ 25.72 billion; LUKoil: US $ 25.09 billion; Sibneft: US $ 14.08 billion;

the RAO UES of Russia: US $ 11.7 billion; and GMK Norilsk Nickel: US $ 11.44 billion.

The market for fixed term contracts. In December, the activity of investors on the RTS market for fixed term contracts (FORTS) significantly increased in comparison with the November indicators.

Thus, in the period from December 1 till December 24, the aggregate volume of trade in futures and options at the RTS amounted to about RUR 35.7 billion (148.7 thousand transactions; 4.6 million contracts), what was significantly above the respective indicators registered in the preceding month (turnover - RUR 28.2 billion, 118.5 thousand transactions; 3.2 million contracts).

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